5.54% CD's and 5.5% mortgages?
- Thread starter farmerEd
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retire@40
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I think you need more of a spread than that, but I also think that spread may be coming. If you can secure a 5.5% mortgage and invest at 6.5% when the rates go up, you may be able to make yourself $1000 per $100K mortgage, assuming no closing costs. Nice if you could do that with $400K-$500K.farmerEd said:
The problem is
1. The CD rates are not guaranteed to go up to a rate suitable for this transaction.
2. At some point, you may not be able to itemize on your tax return at which point you may get taxed on the interest income, but not be able to deduct the mortgage interest. That could actually create a loss scenario.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Taxes.
If you're earning an income, and paying a high tax rate, taking that spread will probably work for you.
If you're increasing your retirement withdrawal rate to pay the mortgage, paying a higher rate of income taxes on that withdrawal, then that probably submarines your spread.
ex: You're taking out 35k a year now, paying 5-10% income tax on that; you take out a mortgage where you're getting...lets say a 1% spread advantage...6% cd vs a 5% mortgage rate. You have to take out an extra 12k a year for the mortgage, and you're paying 15% combined income tax on on that money...whoops...there goes that 1% advantage...
If you're earning an income, and paying a high tax rate, taking that spread will probably work for you.
If you're increasing your retirement withdrawal rate to pay the mortgage, paying a higher rate of income taxes on that withdrawal, then that probably submarines your spread.
ex: You're taking out 35k a year now, paying 5-10% income tax on that; you take out a mortgage where you're getting...lets say a 1% spread advantage...6% cd vs a 5% mortgage rate. You have to take out an extra 12k a year for the mortgage, and you're paying 15% combined income tax on on that money...whoops...there goes that 1% advantage...
I don't follow you. The extra 12K withdrawn is tax deductable, so you're back to 35k at 10%.
I'd consider the mortgage because if interest rates rise, which they just might, you might be making more than 1-2%. If interest rates fall, or stay the same, you can always pay it down. WOrst case you come out even. Best case, you do very well.
I'd consider the mortgage because if interest rates rise, which they just might, you might be making more than 1-2%. If interest rates fall, or stay the same, you can always pay it down. WOrst case you come out even. Best case, you do very well.
Well, only part (interest) is tax deductible, and as the years roll on, less and less, but I see your point. But the increase in size of your withdrawal every year also increases the risk of portfolio failure in down years of the market-ooops, this train lef t the station in another thread.
I think if you are in accumulation phase, and you have locked in a low mortgage rate and love the house, long time horizon etc. and you see CD rates on the rise, setting up a CD ladder with excess cash to "beat the spread" rather than paying off the mortgage early could make sense, since volatility is latin to a CD. But I dunno about once you've retired. But again, we should find the link to that other thread, good arguments made on both sides.
I think if you are in accumulation phase, and you have locked in a low mortgage rate and love the house, long time horizon etc. and you see CD rates on the rise, setting up a CD ladder with excess cash to "beat the spread" rather than paying off the mortgage early could make sense, since volatility is latin to a CD. But I dunno about once you've retired. But again, we should find the link to that other thread, good arguments made on both sides.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Right...the tax deduction would almost entirely offset the withdrawal rate for the first year, then start sliding. You'd also have to overcome any origination or closing costs and any points required to get the low loan rate. Unless you bailed out of the scenario within the first 7-10 years (likely), you'd start losing ground to the tax situation as the deductible interest portion of the payment declines.
How 'bout 5.375%?
Funny you should mention that other thread.
Six months ago we refinanced to 5.5% and saved enough on the payments that our payback period was only... six months.
NFCU just dropped their 30-year rate to 5.375% again. This has happend three times in the last six months and never for more than a day or two. I don't think we'll see it drop further, although I've read that Greenspan is confused & frustrated over a potential inverted yield curve.
Refinancing our zero-points 80% loan will cost us about $1400. We'll do an online application, we'll chisel the title company into re-issuing the insurance (at a lower fee), and we'll do an online appraisal. This time the monthly loan amount will "only" drop by $44 so the payback will be 32 months instead of six. But as Laurence pointed out, we're not moving and CD rates are rising.
Normally the refi hassle factor induces me to wait until the rates drop a quarter-point, but we've already hit the lowest rates in 40 years and I just don't see 5.25% happening. (We won't pay points for it.) The last refinance was also surprisingly easy, although both us and the title company have had a lotta practice over the last five years. We've gone from 8% (2000) to 7% (2002) to 6.125% (2003) to 5.5% (2004) to today. All refi costs have been paid back from the mortgage savings, although of course all these resets means that now the loan won't be paid off until I'm almost 75. And we've paid off a little of the equity-- today's refi will have a loan balance that's 97% of the original.
I won't claim success for another 25 years or so, but the mortgage proceeds are in a small-cap value ETF (IJS) that's up about 8% since last Oct (plus dividends). I'll have to start tracking that progress on a spreadsheet.
Laurence said:
Funny you should mention that other thread.
Six months ago we refinanced to 5.5% and saved enough on the payments that our payback period was only... six months.
NFCU just dropped their 30-year rate to 5.375% again. This has happend three times in the last six months and never for more than a day or two. I don't think we'll see it drop further, although I've read that Greenspan is confused & frustrated over a potential inverted yield curve.
Refinancing our zero-points 80% loan will cost us about $1400. We'll do an online application, we'll chisel the title company into re-issuing the insurance (at a lower fee), and we'll do an online appraisal. This time the monthly loan amount will "only" drop by $44 so the payback will be 32 months instead of six. But as Laurence pointed out, we're not moving and CD rates are rising.
Normally the refi hassle factor induces me to wait until the rates drop a quarter-point, but we've already hit the lowest rates in 40 years and I just don't see 5.25% happening. (We won't pay points for it.) The last refinance was also surprisingly easy, although both us and the title company have had a lotta practice over the last five years. We've gone from 8% (2000) to 7% (2002) to 6.125% (2003) to 5.5% (2004) to today. All refi costs have been paid back from the mortgage savings, although of course all these resets means that now the loan won't be paid off until I'm almost 75. And we've paid off a little of the equity-- today's refi will have a loan balance that's 97% of the original.
I won't claim success for another 25 years or so, but the mortgage proceeds are in a small-cap value ETF (IJS) that's up about 8% since last Oct (plus dividends). I'll have to start tracking that progress on a spreadsheet.
Thank you, Nords. Your details spurred a thought. Has there been a time of high interest rates but low inflation? I mean, it seems the two have more than a passing aquaintence. My boss who is retiring at 62 next year has something along the lines of a $400 mortgage, which was a lot when he moved into the house, but the "ravages" of inflation have made it almost an afterthought.
Similar to Nords story . . .
We got 5.25% on our mortgage 3.5 years ago. The last company I worked for moved us and paid points to get us to that level. I entertained the idea of paying for the house outright, but the company moving package made that a dumb idea. Then I considered paying it off when I retired back in March 2003, but analysis showed it to have a low probability of being financially wise. I use Microsoft Money to track my investment performance, so it's easy to track how I'm doing periodically.
But the original post on this thread suggests replacing a mortgage with a pure CD investment. I don't think I would do that. By the time you pay refi fees and taxes, it probably doesn't pay. You would be banking on the chance that CD rates go up significantly in the not too distant future. I can look at analysis that tells me how a balanced portfolio invested for 30 years has done in the past and see that I have good odds of comming out ahead with my 5.25% mortgage. But I don't have that kind of data for CD's. And if I did, I doubt if it would tell me the odds are very good.![:-\](https://www.early-retirement.org/sk/forums/images/smilies/undecided.gif "Undecided :-\")
We got 5.25% on our mortgage 3.5 years ago. The last company I worked for moved us and paid points to get us to that level. I entertained the idea of paying for the house outright, but the company moving package made that a dumb idea. Then I considered paying it off when I retired back in March 2003, but analysis showed it to have a low probability of being financially wise. I use Microsoft Money to track my investment performance, so it's easy to track how I'm doing periodically.
But the original post on this thread suggests replacing a mortgage with a pure CD investment. I don't think I would do that. By the time you pay refi fees and taxes, it probably doesn't pay. You would be banking on the chance that CD rates go up significantly in the not too distant future. I can look at analysis that tells me how a balanced portfolio invested for 30 years has done in the past and see that I have good odds of comming out ahead with my 5.25% mortgage. But I don't have that kind of data for CD's. And if I did, I doubt if it would tell me the odds are very good.
Laurence, this is just a reminder that long term interest rates
have 2 components ..... a "real" component plus an estimate
of long term inflation. Thus I don't think a "low inflation, high
interest rate" environment is likely. OTOH, if the world
decides to cash in our debt, real rates would likely spike
to attract buyers ..... but this would be followed by the
gov printing money to devalue the debt and inflation would
follow.
Cheers,
Charlie
have 2 components ..... a "real" component plus an estimate
of long term inflation. Thus I don't think a "low inflation, high
interest rate" environment is likely. OTOH, if the world
decides to cash in our debt, real rates would likely spike
to attract buyers ..... but this would be followed by the
gov printing money to devalue the debt and inflation would
follow.
Cheers,
Charlie
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